Can an LLC in a loss position claim a Section 179 deduction, and if so, how is it limited?
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An LLC in a loss position faces significant limitations on its ability to claim a Section 179 deduction. The key limitation is the Section 179 business income limitation, which prevents a taxpayer from using the Section 179 deduction to create or increase a net operating loss (NOL). Here’s a detailed explanation of how this works, with references to the Internal Revenue Code, Treasury Regulations, and relevant guidance:
1. Section 179 Deduction Overview
Section 179 allows a taxpayer to elect to expense the cost of qualifying property, up to a maximum annual limit, in the year the property is placed in service, rather than depreciating it over time. For 2025, the maximum Section 179 deduction is $2,500,000, reduced dollar-for-dollar by the amount by which the cost of qualifying property placed in service exceeds $4,000,000.
2. Business Income Limitation
Statutory Rule:Subsection 179(b)(3)(A) states:
"The amount allowed as a deduction under subsection (a) for any taxable year (determined after the application of paragraphs (1) and (2)) shall not exceed the aggregate amount of taxable income of the taxpayer for such taxable year which is derived from the active conduct by the taxpayer of any trade or business during such taxable year."
Regulatory Guidance:Treas. Reg. § 1.179-2(c)(1) clarifies that the Section 179 deduction cannot exceed the aggregate amount of taxable income from the active conduct of all trades or businesses by the taxpayer during the year. If the deduction exceeds this limit, the excess is carried forward to future years.
Practical Effect:- If the LLC (or its members, in the case of a pass-through entity) has a net loss from all active trades or businesses for the year, the Section 179 deduction is limited to zero for that year.- Any disallowed Section 179 deduction is carried forward indefinitely and can be used in a future year when there is sufficient taxable income from active business activities.
3. Application to LLCs
Single-Member LLCs (Disregarded Entities)
- The Section 179 deduction is claimed on the owner’s return.
- The business income limitation is applied at the owner level, aggregating all active trade or business income of the owner.
Multi-Member LLCs (Treated as Partnerships)
- The Section 179 deduction is first determined at the entity level, subject to the entity’s business income limitation.
- The deduction is then allocated to the members, who must apply the business income limitation again at the individual level, aggregating their share of LLC income with other active business income.
- If a member is in a loss position (i.e., their aggregate active business income is zero or negative), they cannot use their allocated Section 179 deduction for that year, but may carry it forward.
4. What Counts as "Taxable Income from Active Conduct of a Trade or Business"?
- Includes net income from all active trades or businesses in which the taxpayer materially participates.
- For individuals, this includes wages, salaries, tips, and other compensation earned as an employee, as well as net income from sole proprietorships, partnerships, and S corporations, provided the taxpayer is actively involved.
- Does not include passive income, investment income, or capital gains.
5. Carryforward of Disallowed Section 179 Deduction
- Any amount of Section 179 deduction disallowed due to the business income limitation is carried forward to the next tax year.
- The carryforward is subject to the same limitation in subsequent years; it can only be deducted to the extent of available taxable income from active trades or businesses in those years.
6. Example
Suppose an LLC (taxed as a partnership) purchases $100,000 of qualifying equipment in 2025 and elects to expense the full amount under Section 179. However, the LLC has a net taxable loss of $20,000 for the year (before considering Section 179). The Section 179 deduction is limited to zero for 2025, and the $100,000 is carried forward. In a future year when the LLC (or its members) has sufficient taxable income from active business activities, the carryforward can be used, subject to the same limitation.
7. Additional Considerations
- Section 179 cannot be used to create or increase a net operating loss.
- The limitation applies at both the entity and owner level for pass-through entities.
- Proper aggregation of all active business income is required; passive or investment income does not count.
Summary: An LLC in a loss position cannot currently claim a Section 179 deduction. The deduction is limited to the aggregate taxable income from the active conduct of all trades or businesses for the year. Any disallowed amount is carried forward and may be used in a future year when there is sufficient taxable income from active business activities.
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